MONEY AND THE CITY
The political market
Nicholas Davenport
It now looks. as if our bear market is a political, not an economic, one. As I have said, it became panicky when the threat of a dangerous confrontation between Government and trade unions seemed imminent. The FT ' thirty ' index at one time touched 460, losing a third of its big rise as I guessed it might, but at the moment of writing it is back to 485. What caused the recovery of nerve was the significant fact that while the TUC immediately rejected the Heathian £2 package deal for curbing the inflation Mr Vic Feather went on saying that it was not an ultimatum, that the package was negotiable, and that he would be at Chequers on October 16 to continue the negotiation. If the £3 compromise I suggested last week were agreed to there would be a further recovery in the equity shares favoured by a reinforced consumer boom.
It is therefore the TUC who hold the market future, not the Labour Party waving the red flag at Clause 4 socialism, Mr Harold Wilson rides again, we are told, but he still rides in cloud-cuckoo-land. As compared with the new Socialism of Mr Heath's package Mr Harold Wilson's vision of the new Britain is incredibly oldfashioned. We are told to have more and more nationalisation run by state boards vvihich means, of course, more state capi. talism, on the Russian model, much less freedom for the workers, and probably much less economic growth. It was reported that when the nationalisation of the commanding heights of the economy was debated at the Labour Conference the hall was so empty that Mr Benn had to appeal for delegates to return from the bars. It was not surprising. When Mr Wilson produced out of his hat a scheme for a National Workers Capital Fund Which would be fed from retained company profits under some form of State direction no one cheered for no one regarded it as serious.
It is quite feasible for the workers to share in the capital profits created by economic growth if the Government were to set up a public unit trust. Free enterprise capitalism in a mixed economy IS capable of really astonishing economic growth if properly organised and shared. What the workers want is to feel that they are party to the organising and will share In the resulting profits. This is what Mr Heath is groping towards in his package if the TUC will play. It is, of course, embarrassing for Mr Heath to read in the Sunday Times that Professor Nicholas Kaldor views his package "with admiration." "It is far superior," the professor adds, "to anything ever thought out during the whole administration of Harold Wilson and far more radically socialist in character." Kaldor proposes raising the £2 to £3.50 and professes that the execution of the plan would be better entrusted to traditional socialists than the new fangled socialists of the Tory Party, but the crux is that this clever Cambridge economist believes that if Mr Heath's proposals were combined with a floating £ "they could usher in a period of social and economic progress exceeding in scale and duration that of any previous era of British history." So, if the dreaded confrontation between Government and trade unions is avoided, and a compromise package is tied, up at the tripartite talks at Chequers, this political bear market on the Stock Exchange would quickly dry up. It might even be replaced by an economic bull market.
But it would be highly selective. This point must be emphasised because there is danger in the body which is being set up to control retail prices and limit their rise to 5 per cent. Mr John Davies, Secretary for Trade and Industry, is meeting representatives of the retail groups this week to consider the type of council, composed of civil servants, union officials, consumers and businessmen, which will keep a watch on the prices of important commodities and services in the food and textile trades. It is suggested that such a body would be followed by a huge advertising campaign setting out what are considered to be fair prices.
I fear that it is just the sort of body which would muck up trade and destroy reasonable profit margins. Cannot Mr Davies learn from the experience of the American officials who had to set up a price control mechanism in eighteen days before Mr Nixon's statutory freeze came to an end? He should read an illuminating article in the October Fortune by a business school dean, Mr Jackson Grayson Jnr, who was given leave to take the chair of the Price Commission. He was told that he would need 20,000 officials, but he was determined to avoid an inflated bureaucracy and, do the job with twenty if possible. He remembered the wartime controls which once produced six pages of close type to define what was meant for pricing purposes by "fruit cakes." So he had a small body to supervise profitmargin control and "cost justification." He said that the use of profit margins to regulate prices led many businessmen to place a major emphasis on productivity. No company could get its price increase unless it had developed the required productivity data. So both business and the economy prospered. Mr Davies, do please note!
Then there is dividend control to take into account. This without profit control is meaningless but if there is a sensible profit-margin supervision on the American model there will be no need for any profit control by the Treasury. If the trade unions, who think only of incomes, insist on having a dividend control, let them have it. It will make no difference to the market valuation of an equity's worth.
I anticipate no important move in market values until the outcome of the October 16 talks is known. They might even break down but there is probably a sound case for Mr Heath going forward to meet the TUC call for an advance on £2. The economy is certainly lagging behind the Government's 5 per cent growth target. De-stocking by manufacturers in the second quarter held back output and investment is now reported to be 7 per cent below the 1971 level. Mr Heath may therefore agree to give a further boost to the economy of the order of £1,000 million. Professor Kaldor argues that for the average earner £2 represents 7i per cent extra on the money wage which means an advance of only 2.i per cent in real terms if we allow a price rise of 5 per cent. He thinks that a wage advance of 5 per cent in real terms would be justified seeing that a 5 per cent growth in the gross national product would, mean a rise in company profits of 10 per cent in real terms or 20 per cent in money terms. If the Government is convinced that the economy is lagging behind his 5 per cent growth target Mr Heath might well agree to a further boost by raising the £2 to £3. Mr Barber asserts that they are determined to get 5 per cent growth. Let us not be too optimistic about a settlement. We must expect some clamp down on profits from land development before the TUC agrees to a deal. And then we cannot be certain the TUC can bring its militant unions to honour the bargain. Still, it is something to bargain with practical bodies like the TUC and the CBI and not have to bother with the unpracticable coalition over which Mr Wilson rides again.
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